Unraveling the structural sources of oil production and their impact on CO2 emissions

Article  -  Thursday, 4 July 2024

Herwartz, H., Theien, B. and Wang, S. (2024): "Unraveling the structural sources of oil production and their impact on CO2 emissions", Energy Economics

This study is the first to present an explicit view of the structural determinants of oil production across the short-, medium-, and long-term. The analysis relies on a structural vector autoregressive model utilizing a purely agnostic and ICA-based identification approach. The results, obtained from impulse response functions, estimated oil supply and demand elasticities, the decomposition of forecast error variances, and the historical decomposition of oil production, all indicate that, over the past five decades, changes in crude oil demand have had only minor impacts on the actual level of oil production. Local projections of global CO2 emissions on annualized oil market shocks reveal that only supply and aggregate demand shocks have impacted on CO2 emissions, while oil-specific demand shocks did not exert any significant influence.

An important implication of this result is that unilateral demand-side strategies in energy and climate protection policies will experience limited effectiveness, as observed in past policies adopted by a limited number of countries. This underscores the need for a global approach, involving the implementation of a worldwide cap on GHG emissions, as outlined in international climate summits such as the 2015 Paris Agreement or the COP28 UN Climate Change Conference in Dubai. The necessity of establishing a global cap is further underscored by the fact that other alternatives may take too much time to be effective in reaching the climate goals for 2050. One such alternative involves focusing on technological innovation to make alternative green fuels more cost-competitive than oil in the global market. However, this approach requires considerable investments in research and development, and the process may take time. Another promising alternative consists of implementing carbon capture technology, which involves capturing CO2 emissions from power plants and other sources and storing them underground. Nonetheless, this technology requires further research and development to be scaled up and become cost-effective.

While the focus of this study has been on the crude oil market, for future research it would be interesting to determine whether these insights also apply to other fossil fuel markets, such as coal and natural gas.

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